Yves here. The headline above, which is a carryover from OilPrice, is deliberately provocative. Of course US energy independence means something. After all, it’s one of the big rationales given for destroying America’s supply of potable water fracking. But the argument in this piece is geopolitical, that US energy independence is less important than typical, as in parochial, Americans believe.

By Daniel Graeber, a writer and political analyst based in Michigan. Cross posted from OilPrice

Libyan oil production is at its lowest level since the onset of civil war in 2011. In Iraq, oil production is down below the 3 million barrel mark for the first time in five months. Much of the region was highlighted in a global security alert issued recently by the U.S. State Department. For struggling OPEC members in the region, the International Energy Agency said oil production from North America was providing relief for the global marketplace. Some U.S. lawmakers have been banging the drum of energy independence amid record-setting levels of oil and natural gas production. While reducing foreign imports is a source of domestic appeal, it does little to address the ripple effects of international turmoil.

Labor strikes by oil workers in Libya, and demonstrations by the frustrated throngs of the unemployed, have suppressed oil production in the troubled North African country. Oil production stands at around 600,000 barrels per day, about half of the level posted in July. Libya pumped out around 1.6 million bpd before western forces intervened in civil war. Without Libyan oil at the height of the conflict, the IEA called on its members to release oil from strategic reserves to keep the market moving.

In its market report Friday, the IEA said oil production from Iraq fell below 3 million barrels for the first time in five months. The Paris-based agency blamed insurgent attacks on Iraqi oil pipelines for much of the decline in oil production in July. That same month, the United Nations said more than 1,000 civilians were killed in acts of terrorism, the highest since “the blind rage” of sectarian war prompted the U.S. military to adopt its so-called surge strategy for Iraq.

The IEA said production from members outside OPEC was helping address supply issues in the Middle East and North Africa. Non-OPEC output should reach 55.4 million bpd by the fourth quarter of 2013 with the help of North American production. The U.S. Energy Department said domestic crude oil production reached 7.5 million bpd, the highest monthly level of production in more than 20 years.

The increase in North American oil production is expected to help buffer against the increase in demand expected as the global economy recovers. For the United States, the production boom means imports of foreign oil should fall to their lowest level since 1985. That means less strain on OPEC. Rep. Fred Upton, R-Mich., chairman of the Energy and Commerce Committee, said North American oil production would “displace our need for imports from hostile nations overseas and help free us from OPEC’s influence.” The U.S. Labor Department, meanwhile, said the U.S. oil and natural gas sector accounted for the bulk of the employment gains seen since the onset of the global economic crisis.

The rhetoric on energy independence does not hold up well when considering the strategic petroleum release that coincided with the 2011 crisis in Libya. The IEA said the release was meant to provide short-term liquidity to international oil markets trying to make do without Libyan oil. U.S. oil production gains, meanwhile, means the United States is using less foreign oil, not adding more to a market plagued by conflict in oil-rich regions. A Congressional measure enacted in response to the Arab oil embargo in 1973 means the United States can’t export crude oil except under very specific circumstances. When oil prices escalated in July, it was because of the Egyptian political crisis. No amount of U.S. oil production could change that.

National security and energy security are interconnected because of the economic ties to foreign and domestic policies. Overseas engagement means just as much for security as does domestic economic achievements. To borrow from former President George W. Bush, lawmakers should reject “the false comfort of isolationism” not support the cause.

33 comments

“the false comfort of isolationism” (GW Bush)
A quote which will live in famy. The old isolationism of the ’30’s was never really isolationist (ask the Koch Bros about daddy). Just against raising an army and joining in stupid European brawls. Oh for those good old days!

Once upon a time there was an organization called the IEA, and they were like politicians. You couldn’t believe in either of them as everything they said had to be taken cum grano salis. Particularly as one financed the other.

Neither were rationally capable of reality-based estimates. They’d both succumbed to the crude allure of greasing black art down a deep hole which was never to be used again.

But they stuck together and produced a spiffy new report. It was oil industry propaganda magnificently penetrating to the core, but you would be in dangerous deepwater if you stuck with it.

Worries over peak oil and future declines in production were substantially well-grounded. This meant that Hess Royal Humpty Dumpty might take an Occidental fall continuing to Exxonist in his short-lived bubble which was expected to peak around 2018 (Hughes/shalebubble.org & Berman).

What’s more, the IEA along with the government, were incapable of properly predicting car emissions or global climate changes in decades to come, let alone how to predict things like war and sectarian violence around the world.

The “free market” wouldn’t control consumption either, so China and India would hit the road but not in the way we would all like. Oil prices were not going to drop significantly too. Where on earth would oil companies get the money for new high-cost rapid-fire investments which they believed would increase capacity?

Well, new investments would only offset declines elsewhere, so whilst Americans swapped Pizza Hut for a Peasant Hut in environmental poverty, Mr Oil would find a lullaby, and pack his bags for the twinkling planet of Elysium.

The restructuring of where we import the remaining oil that is still necessary to make up the difference for our huge demand tells just how important energy independence is. Canada, Mexico and Venezuela, along with Nigeria and Saudi Arabia is where the foreign oil comes from today. Obviously, only one of those countries sits in the danger zone of the Middle East. And the last Arab oil nation we deal with is the MOST important one of the Islamic nations in the world due to the Holy places of Mecca and the annual pilgrimage required by religious duty. We have deliberately insulated ourselves from the instability of that region by getting oil from the closest of our neighbors right on the border. We easily move oil by land via pipelines and rail vs ocean going tankers from the immediate northern and southern borders of the US.

But if the most of the imported oil is from politically stable areas where we can most easily project our power to control the cheapest flow of oil, why then shouldn’t the market reflect this strategic situation that is structurally in our favor? The price of risk sounds to me like military intelligence, an oxymoron. With the thorough debunking of economics as a science, predictive of price under perfect circumstances, how does the supply demand model work in relationship to inter nation-state conflict or internal violent upheavals. And, internally, I am not talking violent labor strife. Syria, Libya and wartime Iraq are not producing or cheaply capable of transporting crude to foreign markets. The Iranian missile threat to Gulf oil tankers through key choke points on the open seas also raises the chance of war. Here, the pricing capacity of a market system is made completely irrelevant. During war, if you can not fuel your military and hold supplies by force, it does not matter what price you will pay or how much money you have. The price is blood, not currency and the market is no longer the mechanism of allocation of scarce resources.

But we have restructured the logistics of fuel supply in our favor, and are now told the price of oil is set by global demand, and not on the basis of cheaper transportation without the military costs of security in the form of the US Navy continually operating in the Mediterranean and Arabian Gulf. Not to mention the apparent need to invade countries in the immediate area over the past 2 decades, and leave a foreign military garrison to ensure economic control. Again, it is the market enforced by global military might which allows pricing to happen at all. The Arabs did stop the flow of oil once during the 1973 embargo. So much for free markets as the natural state of affairs that should guide the price of oil around the world.

What and who are we independent from? I am certainly not independent from Big Oil, and Gas fracking that is now being incorporated into Big Oil. Perhaps profits to Corporate America and Corporate Global are better situated, independent of what goes on the Middle East and N Africa. But that is all. On the scale of analysis of worldwide, transnational capital flows, there may be free markets and independence, but on the unit of analysis of my life, there are only rising bills to pay and crazy fluctuations at the gas pump. What am I independent from?

When I was following the oil industry in the mid-90s, cash costs were around 5-6$ and finding costs/replacements costs between 8-12$. All in all a total = 18$. The price of oil revolved around that amount from the 80s to 1999.

When the oil price soared in 2007-2008, I redid the calculation on a few firms and came up with 30-50$ depending on the grade.

Of course that was before they had started capitalizing costs for the development of oils sands projects… companies have been adding huge debt to fund these expansions and the ensuing capitalized costs will end up getting depreciated and this will increase replacement costs.

In my estimation, most of our current business models based on ROIs were set up over the last 3-4 decades using cheap oil… lower rates and a lack of proper maintenance have probably been masking the higher price of oil.

However, over the next few years or decade, as new projects come on stream, they will have to incorporate higher rates and higher oil prices.

IMO, we are at the peak of a 40-year cycle with another recession to go. Banks got too big to fail and I would not be surprised to see the same thing happen in many more sectors. When the economy slows (it does every few years), we will probably see more M&A and capacity destruction.

And when we come out of the next recession, that’s when I expect to see inflation.

“Free markets” have never existed and never will, in the sense you imply they “should” determine oil prices. Governments and powerful wealthy individual or corporate interests have ALWAYS thrown their weight around to corner the markets on whatever product they felt benefited them most. Today, it’s oil. In the past, it’s been spices, grain, timber, gold, tea & a long list of other things. The only way to change that is for everyday people to use our vastly larger numbers to counteract their financial power and provide our own energy needs in ways that can’t be centralized (not an easy task, but doable).

the oil & gas industry has been citing a PWC study which says they account for 9.8 million full-time and part-time jobs and accounted for 5.6 percent of total US employment.http://www.api.org/~/media/Files/Policy/Jobs/Economic_Impacts_ONG_2011.pdf
this attributes all kinds of jobs, even in agriculture, to the oil & gas boom…
using their methods, one could argue the oil & gas jobs are the result of people using gasoline to drive to the mall, so there’s a large jobs multiplier for retail activity as well……

Look, the oil & gas industry is a blinded one-eyed Polyphemus getting drunk on their own Kool-aid thinking they fire up industry and employment. Unluckily for us they simply don’t collapse on the floor and pass out.

Trouble in fracking paradise – The shale revolution is “a little bit overhyped,” Shell CEO Peter Voser said last week as his company announced a $2.1 billion write-down, mostly owing to the poor performance of its fracking adventures in U.S. “liquids-rich shales.” Which of its shale properties have underperformed, Shell didn’t say, but CFO Simon Henry admitted that “the production curve is less positive than we originally expected.”

Shell was a latecomer to the tight oil game. As late as 2010 it was acquiring mineral rights at inflated prices, predicting that those properties would produce 250,000 barrels per day in five years. Three years down the road, they are yielding only 50,000 barrels per day, and the company intends to sell half of its shale gas and tight oil portfolio. Second-quarter earnings were dismal for the so-called oil supermajors. Shell, BP, Exxon Mobil, Chevron, Total SA, Statoil, and Eni SpA all reported sharply lower profits.Production was also down nearly across the board, with only Total SA reporting an increase.

Something being overlooked here is the trade deficit. The two biggest components to it is imported oil and consumer goods. If we can reduce imports due to increased domestic production that takes pressure off the private sector to run deficits (increase savings rate), and the government sector to run deficits. Now if we can bring down domestic consumption this would be a definite plus for the economy.

How long can a country keep on importing BOTH? These are the warning bells that most Americans don’t hear.

The reality is that it was cost efficient to import both. So if the US wants to bring back production, that means it will need to consume more oil to produce that stuff… but it is already importing oil…

This means the cost of living is going to shoot up over the next decade.

Bubbles in financial markets always end up being inflationary because:
1. people get lazy and capital gets badly allocated
2. the money in the markets starts getting spent at exactly the time when assets are not productive anymore

Nations have almost always imported SOMETHING; even in the middle ages, there was international trade. How we currently violate common sense and long-term national survival needs is that we import far too many NECESSITIES — such as clothing, food, basic household items and, yes, energy — that we once made quite easily. Those things should ALWAYS be made locally; trade should be for luxuries and voluntary travel. That applies equally to long-distance intranational commerce, too, since national boundaries are arbitrary. In an energy-consumption and ecological sense, we’re de facto importing such goods if we live in MA and get vegetables from CA, fruit from FL, and beef from TX.

We might get lower oil prices for a few years thanks to US drilling and a global economic slowdown but independence is a pipe dream, IMO.

Why? Because nothing is done to reduce oil dependency. Most people still believe we can keep on living and operating the way we have been for the last 40 years. However, the fight for energy will just intensify globally. We can already see it popping up with nationalizations of energy.

It takes an increasing amount of oil and water to produce a single barrel of oil and this will force us to radically change our lifestyles.

“and this will force us to radically change our lifestyles” is a little naïve. There is insufficient support for renewables today even though the increase in earths temperature is factual, along with increasing CO2 emissions (China and India BIG culprits). The oil and gas industry, care of this IEA report, clearly want us to think that our future is rosy tanked up on cheaper petrol so we’ll go out and buy more cars. No impetus for alternatives here I’m afraid. It’s “clear history” but without any electric Howards in Marthas Vinyard.

I am not implying we will go for alternatives. I am implying that our leaders are planning for more of the same. This means that we will be forced to shrink our materialism over time as misallocated capital going into energy intensive endeavours sucks energy away from households.

We can expect:

-Smaller houses and a lack of money to maintain badly located houses
-Less cars over time and smaller ones
-Less energy intensive household activities (i.e. BYE BYE intercity soccer moms driving a few 100 km every week for games and practices).

IMO, we will not be embracing alternatives and sustainable development, we will be forced into meterial austerity

You are damn right it doesn’t, because it is simply a PR campaign selling yet another flavor of American Delusion.

–Shale oil and gas “reserves” are recoverable at perhaps 8% vs 30% for conventional reserves.
–Reserves have been re-adjusted downward to as little as 10% of initial estimates for many “plays”.
–Depletion rates average 40% per year, thus requiring continual drilling at an ever increasing rate to maintain constant production levels.
–Exponential growth of anything, including rate of drilling is a mathematical impossibility.
–The highest probable yield wells in a given field are drilled first. Thus production per individual new well invariably drops off over time.
–A laterally drilled and fracked shale well costs roughly eight times as much as a conventional well and only produces a fraction of the flow rate.

So why all the hype about American Energy Independence?

First, its politics as usual— feed the sheep pablum this week because they will have forgotten all about it by next week. But more specifically, the Independence campaign is cover for the oil majors like Shell and Exon who got suckered into the shale oil land grab too late and are now trying to offload overpriced leases that in the light of day can never produce enough to make them profitable. (see Shell’s recent 2 billion dollar shale lease tax write-off)

Prediction: There will be no significant shale oil and gas industry in the USA by the year 2025.

Interesting bit about our 1973 deal with the Saudis – that we would not export crude – giving them the monopoly they wanted. Having been good partners now for 40 years, I find it hard to believe that, although the Saudis want to break the appearance of cooperation with us, they want us out of their country, that at the same time the Sunnis are starting to like moderates in Iran. The situation is sufficiently complex that it has to be tactical. Can’t have Saudi Arabia and Iran turning into Iraq. Or maybe that is the goal. Add to this political stuff the US claim that we will stop importing oil and become independent, which looks foolish at best. Then the latest comments about how the US is going to become a giant gasoline exporter (notice not crude) and the news about the LNG export facilities already in Louisiana. How can we become independent if we export all of it? And on top of all of the conflicting bits of information, I haven’t seen one report anywhere that says growth is coming back. How exactly is growth coming back when the price of oil must stay too high to permit it? Not to mention the costs to the environment which are now coming due?

Oil independence is probably a fiction. The surge in oil production is largely due to fracking, and there is plenty of evidence that fracked oil wells perform differently than ‘traditional’ oil wells.

More importantly, fracking is being used to also accelerate the production of existing oil wells.

Even if the 70% year on year production falls are actually 30%, what this means is that the 500 million barrels of oil per year difference in US domestic oil production – which is providing at least $50 billion per year ($100/barrel) in less trade deficit/increased domestic earnings – is going to go away pretty quickly.

“destroying America’s supply of potable water = fracking”
Yves, you and your bloggers are adamant that fracking is destroying the US’ water supply; what are the indisputable data (not blogger ranting) that proves that is true in all fracking situations?
Wouldn’t it be more effective (for some group) to work with industry directly (instead of remotely), in an effort to optimize the environmental / energy supply trade-offs? Complaining off on the sidelines accomplishes little. Fracking is going to happen, let’s figure out how to do it optimally

I notice you are a first time commentor. When I see first time commentors running industry talking points, the assumption is that the writer is a troll, either formally (as in paid for) or due to personal allegiances.

To the substance: you discredit yourself by saying the onus is on critics to say fracking is implemented unsafely 100% of the time. The industry is actively gagging people who see unsafe implementations (as in settlements with large gag orders). And on top of that, you require us to prove a negative, that fracking is never unsafe. That’s an impossible and irrelevant standard. The onus is on frackers to prove that they can and will submit to a regime where they protect water supplies, submit to tough oversight, and pay large penalties in the case of violations. I hear nothing of the kind from anyone involved in the industry.

Moreover, you act as if the only issue is the risk to aquifers, which is real and considerable. On top of that, fracking ALSO requires large amounts of water. Potable water, and not carbon-based energy sources, is the world’s scarcest resource. Most forecasts show that we start running out around 2050.

In addition, you take the dubious “TINA”: there is not alternative. Sorry, there are alternatives, such as making do with less, and preferring cleaner energy sources.

And politically, hard opposition is the only way to get any kind of concessions and curbs from a reckless and well connected industry. So politically the strategy of calling out frackers for the considerable damage they do to water sources is politically sound.

1) Vehicle miles driven in the U.S. peaked in 2007 and have yet to recover.

2) Demographics are important too…boomers are aging and their penniless/jobless offspring are postponing driving, household formation, etc (among other things) while shifting to urban areas.

3) Average mileage has improved. In 2003 a V6 F150 averaged 16 MPG. In 2012 that number was 18 MPG. Not to mention fewer people are driving trucks, but the point is even at the bottom end of the distribution mileage has improved.

4) The whole labor vs. capital discussion (that Krugman ignores) and labor’s declining share of economic value added in the U.S. is coming to a point where the average person has less to get by on in real terms…so they drive less.

Ummm … It would seem that ‘improved mileage’ is a paper phenomenon rather than something real.

From personal experience, the brand-new full-size pickup trucks get 11 miles per gallon just like the older models. The EPA sticker on the window lies.

Other thing to keep in mind is that new vehicles do not take the trade-in vehicles out of service, the ownership or custody changes instead. New vehicles replace those at the end of their service lives, maybe 15-20 years old. Many of these are small cars that got +35 mpg, these are replaced by pickups and SUVs.